A Year-End Update On Wynn Resorts

While value investing in 2017 has not been an easy task, one constant bright spot in my managed accounts this year has been casino operator Wynn Resorts (WYNN), which has been on an absolute tear.

My last update was back in May when I outlined how my conservative $150 fair value estimate was likely going to prove to be just that… too low. Since then the shares have continued their ascent, rising from $125 to $165 each. My prognosis from eight months ago ($160 by 2019) is therefore outdated.

While I have been trimming my WYNN positions as the stock has continued higher, the company continues to impress from a financial results perspective. My original $150 fair value figure was based on 15x annual free cash flow of $1 billion, which seemed to be very achievable once the company’s second Macau property, Wynn Palace, opened last year.

Despite ongoing construction in the area, which has limited street access and visibility for the new resort, WYNN’s numbers have been staggering, as cannibalization of their legacy property in the region (Wynn Macau) has been far less than many analysts expected. In fact, over the last 12 months for which we have reported financials (Q4 16-Q3 17), Wynn has posted operating cash flow of more than $1.5 billion. If we assume maintenance capital expenditures of $300 million annually, my $1 billion free cash flow target for the three resorts now open will prove to be be too low to the tune of $200 million or more. I would say $180 per share is probably closer to the right number for the core properties, and that assumes no future growth from those assets.

And then of course we have the Boston resort currently under construction (due to open in mid 2019), as well as phase 1 of the company’s Paradise Park expansion project in Las Vegas which could be open within a year. I continue to see those two projects adding $16 per share to my valuation, which means WYNN stock could see $200 per share without being aggressive in one’s underlying financial assumptions. In gaming parlance, it probably makes sense to reduce your bets but I am not getting up from the table completely just yet.

Full Disclosure: Long shares of WYNN at the time of writing, but positions may change at any time.

3 thoughts on “A Year-End Update On Wynn Resorts”

    1. Full disclosure: Prior to the news breaking I sold it down to a 4% position at $194.75 per share. I have not made any changes post-news as of yet.

      There are really two main issues: 1) how much will business at the existing properties go down, if any, and 2) will regulators actually try to yank any licenses away from the company.

      The first seems likely, especially given the large convention business, while the second seems less likely, but not impossible. Obviously Steve’s actions from here on out could impact the actual business ramifications. He has a lot of options and we don’t really know what he and the board will decide. I don’t think we have enough information yet to make an investment decision. On one hand we could sell believing the business is permanently impaired, and the next day he could take a company private, change its name, hand it off to new management, put his shares in a blind trust, and retire. On the flip side, he could act more like his buddy (President Trump) and try and hold on as long as possible and take on the business risk that would come along with that. Since I have been trimming it over time, I am sitting tight on my remaining shares until we know more, but I totally understand if others choose a different path and cut it loose. And there is always a chance the sell-off gets much worse and once we know more later on it actually becomes a buy again, like it was sub-$100 a few years back. Will be an interesting ride for sure.

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